DEPARTMENT OF BANKING & FINANCE, PROJECT TOPIC: CENTRAL BANK SUPERIORITY ROLE IN FINANCIAL SYSTEM IN NIGERIA (A CASE STUDY OF CENTRAL BANK OF NIGERIA, LAGOS)
CENTRAL BANK SUPERIORITY ROLE IN FINANCIAL SYSTEM IN NIGERIA
(A CASE STUDY OF CENTRAL BANK OF NIGERIA,
LAGOS)
CHAPTER
ONE
1.1
BACKGROUND STUDY
A central bank is the monetary
authority established by the Government of a country to oversee the over all
financial and banking transaction of the country. This is a bank at apex of the
banking system serving as principal of all banks in such country, the central
bank of Nigeria (C.B.N) occupies the position in this country.
The background to the
establishment of central bank of Nigeria
(C.B.N) lies on the characteristic and deficiency of monetary system which preceded it. This was the currency
board system a British colonial money system whereby the currency or legal
tender obtaining in the colonies before independent and in some cases, such as
(Gambia
for some year after independent) was issued by a currency board. In the case of
West Africa the issuing authority was Africa
currency board (W.A.C.B).
The W.A.C.B was established
in November 1912 following the recommendation of the Emoh communities appointed
by the British colonial authority to study was and means of dealing with two
basis necessities .
One was financing the
need of the export trade of the expatriate firm in west Africa and the other
was the eradication of the confuse, in convenient and unsatisfactory currency
position in British west Africa. The W.A.C.B
was changed with four main functions the issue of a West
Africa currency of exchange for existing currency, and investment
of its resources.
THE WACB RELIGIOUSLY DISCHARGE THREE
FUNTIONS:-
In the process, however it was
characterized by three elements; fixed parity of local currency with starling,
automatic issue and 100 percent sterling Converge. To the prominent of the
system had many advantages for Nigeria.
These
were the views of two British financial experts who studied the system very
closely. According to one of theory 100% sternly coverage answered the exchange
stability of the West Africa currency in term of sterling while automatic link
with starling ensured that in term of financial stress, Nigeria could look to London for help which is a most important
financial consideration.
The
deficiencies of WACB cannot be over emphasized in the first place, the currency
issued by the board was not an independent currency unit. Indeed whatever its
virtue the board had no reason for financial or monetary management. In
particular the system was operationally rigid institutionally limited. Rigidity
was the inevitable outcome of full coverage and automatic party with sterling.
Furthermore, as it was automatic linking
currency circulation of the balance of payment, it could manage.
The board therefore lacks any power of
monitory control and thus any power to imitate and execute monetary policy.
Another serious short coming of the
WACB may be mentioned, it did nothing to train Africa
in the art of monetary management or to develop indigenous banking and other
financial institution.
Consequent to be inherent weakness or
deficiencies of the currencies system coupled with banking.
Facilities of the early fifties and
because the WACB did nothing to develop the banking system, the serious debate
the abolition of WACB and replacement by central bank of Nigeria ensured.
After series of debate and
recommendation, most especially J.B Loyness in 1957, favored the establishment
of the central bank of Nigeria
and by 17 march 1958 the central bank ordinance was promulgated and became full
operational on 1st July, 1959.
1.2
STATEMENT OF THE PROBLEM
What to do to promote monetary stability
and sound financial system? How do we issue legal tender currency in Nigeria? How do
we maintain external reserves to safeguards the international value of legal
tender currency? How do we act as banker and financial adviser to the federal government?
How do we supervise the activities of the banking system and the economic? That
of is to say, how to carry out its major objectives. These questions and the likely problems that
are likely to be face by central bank of Nigeria.
The difficult in solving these problems
and more appreciate when one considers the nature of complexity and massive
activities involve in carrying out to major objectives and functions.
This essay will examine the problem and
constraints faced and by (CBN) and make necessary subjection to over come such
problem and constraints.
1.3
OBJECTIVES OF THE STUDY
This study aim of enabling us to
examine to superiority role which the central bank of Nigeria (CBN) plays in
the financial system in the economy.
The primary aims of embarking on the
project work are: -
i.
To examine the role of central bank in the
development of Nigeria Economy.
ii.
To examine the function performed by central
bank both the sectary and development function.
iii.
To structurally compare the central bank with
commercial bank in
Nigeria.
iv.
To examine unhealed the instrument which the
central bank used in controlling the activities of commercial bank.
v.
To access the extend to which the instrument
of the central are effective and justified.
vi. To
examine some of the problem of central bank of Nigeria.
The secondary aim of undertaking this
as a pre-condition for the award of the NATIONAL DIPLOMA certificate in
accountancy Kwara state Polytechnic
Ilorin.
1.4
SIGNIFICANCE OF THE STUDY
This project work becomes
necessary as well as essential given the superiority role layed by the central
bank of Nigeria in the bank
system and also in the economy of Nigeria.
(1)
To highlight how the CBN carries one its
superiority role over all other financial institution.
(2)
To bring to light, the instruction of control
used by CBN over the commercial bank and other financial institutions.
(3)
Through this project work by analyzing the
superiority role of CBN dues will be given as to future growth of CBN.
(4)
Advice will be given to bank on decision
making as regards the functions performed by CBN.
Therefore if all the point stated
are well analyzed it will be possible for an outsiders with a knowledge of
banking to understanding the CBN’s positions in Nigeria economy.
1.5
SCOPE
AND LIMITATION OF THE STUDY
Our research will be limited to the superiority play by the CBN
based on the historical background of CBN and useful solution shall be offered
to the obstacles facing the Central Bank in Nigeria economy.
Essentially this research emphasis
on the instrument of control used by the CBN in regulating the activities of
financial system in Nigeria.
During the course of carrying out
this study the researchers encountered many problem and obstacle which affected
the successful coverage of scope of study.
(a) Times
constraints:-
The researchers have
to ration the limited available time between classroom lectures, reading and
gathering for the study.
(b) Reluctance to Release information:-
Some of the refuted information was
not obtained because of severely or non-availability of the information.
(c) Prejudices and Bias:-
This resulted in
postponement of appointment for information that requires simple and concise
answer.
1.6 ORGANISATION AND PLAN OF STUDY
This
project work shall be divided into five chapters in the following order:-
CHAPTER ONE:-
Shall
deal with the introduction to the project topic acquaint the reader more
clearer on the statement of problem, background of this study, the
significance, scope and limitation, and organization and plan of the study.
CHAPTER TWO:-
Which is the literature review shall
deal with, the role CBN in the development of required economy function of
central bank and it shall compare the central bank with commercial banks i.e.
sharing the differences between the central bank and commercial banks.
CHAPTER THREE:-
The Chapter with case study and
methodology
The chapter shall discuss the historical
background of the central bank of Nigeria, The research methodology
of the study i.e data collection process.
CHAPTER FOUR:-
The chapter shall deals with
presentation and analysis instrument of control used by central bank
effectiveness of the instrument financial bank in Nigeria shall all be
discusses in this chapter.
CHAPTER FIVE:-
This is concluding part of the project,
conclusion to express writers view on the subject matter and recommendation
will be on possible solution discussed in the previous chapter
CHAPTER
TWO
2.1
LITERATURE
REVIEW
Banking industry is one of the important sector in the
economy of all countries of the word and this is the reason why various groups
of people such as authors, academicians and professional have made various
comment on the banking system (financial system) and its practice, throughout
the whole world and Nigeria banking industries is not an exceptions to this
practice the comments of various interest reference to Nigeria banking system
will be treated.
Olaousi (1978) said that banking is
the creation of man and that is started in Babylon
about four thousand year ago, but modern banking started in Britain in 17th
century and since then the industry has been witnessing structural changes
which has led to the establishment of commercial bank, merchant bank,
development bank and Central Bank within this industry.
Ndekuru (1990) Said that central
bank of Nigeria
had a humble beginning when it started its operation in July 1959 with a public
issue of its currency to replace the currency of West African board and of
course the limited assigned to the bank with the conservative characters its
objectives at the beginning.
Where born by ratter negative
attitude of official and academician who had earlier advised on the
establishment of the bank because they misinformed by the orthodox concept of a
central Bank as a bank of issue of currency theoretical misunderstanding monetary management to
means control of money supply alone.
He further said anyone who looked at
the assigned to the central bank of Nigeria
by the original of 1958 and compared the operation of the bank between 1958 and
1960 (s) and now would be amazed by the bank tremendous growth and development
process of Nigeria
economy function assigned to the bank.
The banking sector is one of the
most regulated in any economy throughout the world and therefore the industry
is witnessing the same things in Nigeria.
Nwankwo G. (1988) said that virtually
in all developing economics, the banking industry is more regulated then say
any other commercial or industry section even in developing countries, the
position is the same and can be said equivocally that banking is more heavily
regulated in all countries than any other section.
He further said that it is the
uniqueness of banking because a bank is a financial institution that differ
from other instruction due to its crucial product area
which
is offering of demand or transaction deposit and undertake commercial handing
such as it central to nation payment system, the centrally in the economic
system and saving investment singles banking out for much heavier regulation
them any other activity.
Afolabi Li (1994) describe the
management as part of the cause of distress by saying that bad management is
singular factor that bear a high shear of cause of bank failure and reason for
this base on the attractiveness in the mid stream of banking operation without
proper grooming, ignoring the fact that banking is a district profession of its
own intricacies of idiosyncrasies.
2.2 HISTORICAL BACKGROUND OF CENTRAL BANK OF NIGERIA.
The first recorded move toward the
establishment of the central Bank of Nigeria was April, 1952 when
members of the federal Houses of Representative proposed a private member of
the motion for the establishment of Central Bank to perform those function
generally expected of central bank.
This motion was not passed by the
house because the colonial authority considered the establishment of such a
bank in the society being premature in view of the relative under development
of the domestic financial system and the money market.
However, on amendment to the motion
calling on the government to examine and report to the house they possibility
of establishing a Central Bank of Nigeria (CBN) was passed. Then the adviser of
the Bank of England, MR.J.L Fisher was commissioned in 1952 to study the
possibility and practicability of establishing the bank did not favour the
proposal in the immediate future.
It was World Bank mission to Nigeria in 1953 which regarded the request for a
central Bank of Nigeria
(CBN) expedient on the both political and national ground sand therefore,
recommended a state bank of Nigeria.
Subsequently, the government invited another adviser to the Bank in England
MR.F.B.Lyoness in 1958 to the feasibility of establishing the bank and the
recommendation made their formed the essential basis for the Central bank of
Nigeria (CBN) act of parliament, basis for the Central Bank of Nigeria (CBN)
under the enabling Act, the policy and the government administration of the
affairs and business of bank were the responsibility of the board of directors,
made the governor of Central Bank of Nigeria (CBN) (as chairman), the deputy
governor and five other part-time Director all appointed by the head of state.
The Central Bank of Nigeria
commended business on 1st July 1959 with an initial capital of N3.0
million.
2.3 THE ROLE OF THE CENTRAL BANK IN THE DEVELOPING
OF NIGERIA
ECONOMICS
The traditional functions of the
central bank have been the maintenance Of table domestic price and balance of
payment equilibrium.
But with the adoption of conscious
economic planning by government, the central Bank in developing countries are
now regarded as in important part of the planning machinery, so since 1950,
African central bank have been essential development agencies. The Central
banks in Africa have contributed to economic
in various countries in various ways.
i.
The Nigeria central bank has been
helping in its provision of capital fund.
This is done by promoting the growth of
financial institution in the country.
ii.
It does this by supervising the commercial
bank, and enforcing standard of operation though it bank examination
department.
iii.
It sees to have viability of the country
financial system. Hence it act is the leader of last resort in order to make
liquid fund available to financial institution when need be. Also set up banks
clearing house to assist the commercial bank to effect speedy clearing and to
help them determine their net cash position promptly.
iv.
It instrumental to the development of the
capital market the extend, it also, act as the under writer of government.
v.
It is also employs selective control of
credit. This is the way by which it controls the tending capacities of the
commercial banks. It used various devices like open market operation, bank
rate, moral suasion and on.
vi.
It employs moral suasion channel credit into
priority sections and away from low priority one in accordance with national
priority, the central Bank seek to influence the commercial banks to channel
their credit to preferred sector by issuing guide line or decreases in loans
and advance to each section for instance, they were made to increase their
loans to the agriculture sector.
vii.
In Nigeria
before 1970, since expatriate banks did not give much loans to Nigeria
businessman. But in 1970, the central bank gave specific instruction that every
commercial bank should grant a minimum of 35% of if loans and advance to Nigeria. This
has been helping the indigenous businessmen to develop their business.
viii.
Finally, it gives technical and consulting
assistance to the government and business sector.
I. It
is the financial adviser to the government.
II. It
is initiator of the monetary policies. Therefore it has been assisting
economics securities. It helps in the establishment used in the capital market,
through which the financial institution can invert their temporary ladle funds
domestic savings, discourage the transfer of such overseas.
III. It mobilizes
saving for investment, there in done by providing attending saving facilities
and institutions and the maintenance of the real value of saving the central
Bank provides median finance to the financial institution by rediscount but for
between 2-5 years. This make the discounting houses give advances to
businessmen.
IV. It’s
also active in export promotion.
V. It
has been given various forms of support to export in of other to increase
foreign exchange carrying, for instance, like that of Ghana and Morocco, the
Nigeria central Bank indirectly hands finds to the marketing board though the
commercial bank and acceptance houses for the finance of export management by
supply useful statistical data for and participating in economics planning.
2.4 FUNCTIONS OF THE CENTRAL BANK OF NIGERIA
i. ISSUE OF REAL TENDER CURRENCY:
The bank in pursuance of if power of having the sole
right of issuing note and coins throughout of Nigeria, issued the first Nigeria
currency in 1959.The currency replaced the West Africa currency Board issued
which were then in circulation in the four British West Africa countries. Since
their, the farm and pattern of the Nigeria currency and political
exigencies. The latest is the document currency which ward into circulation in
1984, while currency note are legal tender (must be taken in settlement of
debits) up to coins can be used for any particular transaction.
This is to ensure that people are not
unduly inconvenienced by being freed to take coins to take excess of what can
be reasonable carried about. Thus 1/2k and 1k coins are legal tender up to a
limit of 10k while 560k, 10k and 25k owe legal tender up to a limit of NB20 for
any one of transaction.
ii MAINTENANCE OF EXTERNAL RESERVES:-
The strength of any currency on the
international share depends on certain factor, paramount trade and the size of
it external reserves will enable the country to safeguard the international
value of its currency.
This mainly used external used reserve
is in playing for air imports good and services and selling our external debit
all arising from transaction with other nations. This the bank ensure that the
total resumes
(T E R) is not less than 2520 of the
total dam and liabilities of the bank at any given time.
The central bank of Nigeria, under the
exchange control act of 1962, has the joint responsibility with the federal
ministry of finance, of interpreting administrating the exchange control
regulation in the country with the emergency of foreign exchange market in
Nigeria and the relaxation of exchange control the bank participate in the
supply and mention the use of foreign exchange in the market.
iii BANKERS AND FINANCIAL ADVISER TO THE
GOVERNMENT:
This bank kept the
accounts of the federal 900 eminent institutions such as universities and
research institution.
It is responsible for flooding all
internets borrowing of the government though the issue Nigeria Treasury bill.
Treasury certificates and the various
federal republic
of Nigeria Development
borrowing (both internally and external.) It has the responsibility for the
formulation and execulation of monetary policy in the economy for the purpose
they make use of monetary policy tools of effective of which one of the
equality ratio, selective credit selling cash reserve requirement and moral
situation. The monetary and credit policy small 1987 has been designed within
the context of the implementation at the structural adjustment programmed (SAP)
to curb excessive demand preserve and stability the economy. This has had a
solitary impart the succeeding year.
iv. FUNCTION IN RELATION TO THE PUBLIC:-
The central bank of Nigeria renders
seller service to the general public and the importance of these services can
not be over-emphasized.
One of the services is the exchange
of note and coin in the derived denomination, for the purpose, air exchange
cashier is always of the service of the general public in due banking office.
For those member of public whose note are torn, burnt, stained, dyed, or for
one reason or the other mutilated, the central bank has the responsibility of
withdrawing old and duty notes from circulation and replace them with new
notes.
As a center for research, the bank
provide statistical data on economic and financial matters, the bank dose this
through its publication like the annual report, the half year report, economic
and financial revenue, the monthly report e.t.c.
v. FUNCTION IN RELATION TO THE FINANCIAL
MARKET:
One of the objects of the bank as
enumerated in the central Bank Act in the promotion of sound financial
structure in the economy.
In essence, the bank to changed with
the responsibility of development in money and capital market in the country
for the development of the markets in banks issued and redeems treasury bills
and treasury certificate manage the bank unity funds(NUF) and process
application from bank for the issuance of negotiable certificate of deposit
(NCO).As for as the capital market concurred the bank issue and redeems federal
Republic of Nigeria help development strode for the purpose of central bank of
Nigeria helps in the small measure in the development of financials institution
such as the securities exchange for investment purpose.
Ix AGRICULTURAL PRODUCTIVITY
In a bid to enhance agriculture
productivity in the economy, the federal government set-up the agricultural
credit quarantine scheme, the management of which has been entrusted with the
bank under this scheme, an initial fund of N 100 million was reedited into
quadrant up of a maximum of 75% what even credit the commercial and meridian
bank extend to the for wars co-operative societies as went as state government
that engage in agricultural from this fund claims in respect of loans which can
not be recovered are met by the banks.
It should be noted, however that the
essence of the whole exercise is to encourage the bank to extent credit to the
agricultural sector. However unpredictable it may appear to be.
2.5 CENTRAL BANK COMPARED WITH COMMERCIAL
BANK
i.
The central bank is a government owned
financial institution which commercial banks are owned by private.
ii.
The central Bank is not set-up purposely to
make profit even though. It makes profit when performing its function as a
motion curse, the commercial banks an the other hand are set-up make even the
maximum profit.
iii.
The Central Bank is the sole issuer of the
national Currency bank in bringing currency into the circulation.
iv.
The central bank act as a banker to
commercial bank whereas commercial bank acceptance of deposit from customers,
given them loans and financial advices but they do not perform these functions
to central bank.
v.
The central bank controls the operation of
the commercial banks by given directive, instruction and persuasion to them, on
how they should give out loans, interest they should charge e.t.c on the other
hand, and commercial banks do not control the operation of the central banks.
vi.
The central banks do not accept deposit from
member of the public. The central bank is not set to make profit but to cater
for the government and other financial houses, its operation are not open for
private individuals. The commercial are set-up for profit oriented. They accept
deposit from private individual because, the more of such deposit they could
get, the more profitable transaction they could make.
CHAPTER
THREE
3.0 CASE STUDY AND METHODOLOGY
The project will give Nigeria the
opportunity to know the superiority role of the central bank of Nigeria (CBN)
in the financial sector.
It will let the people know
powerful the central bank is in the financial system of Nigeria and how
they play their superiority role. It will also serve as reference for student
who wants to know about the financial institution in Nigeria.
3.2
Data
collection instrument
INTRODUCTION
The purpose of the study is to find out the
superiority role the central bank in financial system.
Chapter one of the studies is on
introduction, background of the study statement of the problem, objective of
the study, sign finance of the study, scope and limitation of the study and the
organization and plan of the study.
This area of the study deals with
the methodology and how data are collected.
We intend to employ the
under-listed method in the collection of analysis of our data namely:
§ Oral Interview.
§ Official
Document.
§ Journal
and Business times.
§ Relevant
Text.
The choices are based on the native of
the project and relevant answer required. These answer are needed within the
limited time, interview and observation are used in this research because of
the following reasons.
i.
There is a wide area to be covered by the
research work and interview will result in drawing a lot of question which
might not be possible to answer for quite long time.
ii.
It will also waste time and adequate answer
may not be given because the space or the extent to which the responded can
write is limited.
iii.
Because this type of project is descriptive.
It does not require YES or NO but proper and precise explanation.
OBSERVATION
Most of us that have to spend our
mid-semester in LAGOS and we were able to pay visit to Central Bank Lagos Head
Office, there fore, we make proper injury particularly how Central Bank of
Nigeria play a superiority role in financial system and we observed how those
instrument of control have being effective.
ORAL
INTERVIEW
The use of sending questionnaire to
the respondent together with information relevant to this study is not
adequate. We conducted an oral interview with some selected staff of Central
Bank, Lagos, and the right answer exposing more
to the operation of central bank of Nigeria financial system.
JOURNAL
AND BUSINESS TIME:-
We make use of the official journal
published by the Central Bank of Nigeria and the business. Time so
as to sufficient information for this research work.
CHAPTER
FOUR
INSTRUMENTS
OF CONTROL USED BY CBN
Like all central Bank in the
world, the central bank of Nigeria
possesses on among of tools to control or regulate the activities of commercial
banks in credit creation. Indeed when compared to all other central bank in the
world. Then central bank of Nigeria
can be regarded as one of the most powerfully equipped. It is the task of this
chapter to examine in details the use and mode of these tools by the central
Bank of Nigeria.
It is conventional to classify
these instruments of control into three main categories i.e. quantitative
tools, cost tools, and directional tools. However, since monetary policy is
concerned with the availability, cost and direction of credit, It is more
appropriate to classify and discus the tools under three main heeding, for
instance, according to their primary operation. While the classification is
necessary for analytical purpose, the impression should not be created that
their effect or operations are limited to confirm to their area of primary impact.
All the tools whether quantitative, cost or directional, eventually operate are
have impacts on the availability, cost and direction of credit, with the above
hints let us now proceed to classify and the instrument or monetary control
availability to the central bank of Nigeria.
UNDER
QUANTITATIVE TOOLS
a.
OPEN
MARKET OPERATION (OMO):-
This refers to sales
and purchase of government securities. On the open market by CBN, if the bank
wishes to reduce the volume of money supply, it will sell securities through
broker on open market.
The buyer will pay for these
securities with cheques drawn on their account with the commercial Banks.
The bank i.e. central Bank of
Nigeria which now holds these cheques will thus debit the account of the
commercial with itself, this falls in banks deposits represents a fall in the
commercial bank cash reserves. If they were previously operating at the desired
ratio, the bank will now reduce their deposit liabilities says by calling in
advances to their customers by selling assets or by effusing to grant new
advance. If the bank were previously operating with a cash reserve ratio above
their closure ration, however, the potential that exist for them to expend
their deposit is reduced. Not this in this case if the bank i.e. Central Bank
of Nigeria uses open market operation to reduce the money supply, the official
intention may frustrated as long as the bank cash reserves ratio, main above
the desired level, conversely if the central Bank of Nigeria wish to expand the
supply of money, it will instruct its broker to buy securities on the open
market, it will pay for them with cheque drawn on its self. The seller of these
securities will deposit those cheques with commercial bank which will present
them for payment to the central bank of Nigeria.
The central Bank of Nigeria will
credit the commercial banks account and this will be a position to undertake a
multiple expansion of bank deposit
b.
SPECIAL DEPOSIT:-
The
central bank of Nigeria
deposit with it calls for special deposits are normally express as a uniform
percentage of each bank total eligible abilities.
Special deposit normally earns
bitterest at a rate equivalent to Treasury bill rate. As special deposit are
compulsory, by using them, the central bank of Nigeria can be sure of reaching
the bank liquid assets, and they are equivalent to an open market sales, in
that they reduce the bank ability to increase credit and consequently money
supply is reduced.
C.
FINDING:-
Is the term applied
when CBN attempts to lengthen then the maturity of out standing government
debt? The bank restricts its Treasury bill issue and sells longer dated
securities. These reduce the commercial bank cash reserve and thus restrict
their capacity of expanding bank deposit.
d.
CHANGING THE CASH RESERVE RATIO:-
This is another technique used by
central bank of Nigeria
in its aspect of monetary control. Usually commercial bank are requested to reserved
certain percentage quite difference from spaced deposit with the central bank
in a situation where the CBN informed to increased its cash ratio, this reduce
the credit multiple and consequently. Money supply falls the more; this is
usually effective in an inflationary economy. But, in practice, the action is
not likely to be taken very often because it may bring undesirable descriptive effect
of financial system. In practice, bank may force to hold cash reserved in
excess of legal requirement, but usually happened if there were not enough
potential borrowers of a satisfaction credit standing.
UNDER
CONTROL TOOLS
A.
BANK RATE OR DISCOUNT RATE:-
This is rate at which central bank
discount the first class bull of exchange i.e. the rate at which CBN advanced
bank to the other financial houses such as commercial and discount houses.
Change in the rate of interest at
which central bank of Nigeria
transacts business with other financial houses are often linked with the use of
open market operation (O.M.O). Consider the case where the CBN sells securities
in air attempt to reduce the supply of money.
The sale of securities depressed
their princess and so raises interest rates.
As explain above, the commercial bank cash refers is reducing so that
they may call their loans from the discount houses. The discount may be force to borrow from the
Central Bank of Nigeria
as leader of last resort. In order to
influence the up ward movement of interest rate generally, the Central Bank of Nigeria as
leader of last result.
In order to influence the up ward
movement of interest rate generally, the Central Bank of Nigeria may
force. An increase in the interest rates
in the bill market.
B. COMMERCIAL BANKS INTEREST RATE:
This is a function of bank rate in the sense
that bank rate determine the amount of interest rate to be impose by the
Commercial banks.
Bank
rate and interest rate varies directly and proportionately, an increase in bank
means an increase in the interest rate also and in a nutshell interest given by
the Commercial banks.
UNDER DIRECTIONAL TOOLS
A.
MORAL SUASION:
The Central Bank of Nigeria is the apex of Nigeria
financial institution, but may not consider itself so various that it must hare
to be obeyed by the other bank, its role in the banking Community dictates in
the discharge of its statutory duties.
Moral suasion is persuasive tools intended to convince the bank of the
important of adhering to state policies on money and banking.
Through it activities, it attempt
to educate banking Community of the money market situation. The regular Seminars diners and Conferences
of the Nigeria
institutes of Bank and Bankers Committee are important avenues for central Bank
to virtualize it policies and the need for the other bank to Comply.
B.
REQUEST
From time to time, the central Bank of Nigeria request banks to channel their lending
into certain areas, for instance, in April, 1973 the bank of England asked
bank to provide Finance for both working capital and fixed investment by
manufacturing industries and for the expansion of export and the saving of
imports. To achieve these goals, bank
were asked to restrain other landing in particular to persons and property
companies and for purely financial transaction.
Both moral suasion and requests of central bank of Nigeria are tools under directional instrument
of control used by the central bank of Nigeria.
4.2
EFFECTIVE OF THESE INSTRUMENTS IN USED
The effectiveness of monetary
policy depends on other factors within the economy. This includes the institutional framework,
government policies and the awareness of the banking habit in the economy, for
instance how does one explain a situation where monetary policy aims at curbing
inflation but, fiscal policy embarks on budget deficit?
The federal and state government
embarked on budget deficit in an coupled with expenditure on many prestige
projects. It should be clearly noted
that if oil (petroleum) that contributes more than 90% of the federal
government revenue is not under the direct control of the central Bank of Nigeria. It cannot be possible i.e for every monetary
tools of the central bank of Nigeria
to be effective in any ways but because this had not been so, all other CBN
tools are effectively made us of. In
essence, these are the ways by which the Central Bank of Nigeria had
effectively used its monetary tools. In addition,
the application of monetary tools have been varies since the establishment of
the Central Bank of Nigeria
in 1959, four period were notable in the
application of monetary tools in Nigeria? They are:
a. Passive period
b. The war and reconstruction period
c. The inflation period
d. The post military or
The first two are clearly explain below:
PASSIVE
PERIOD IN 1963-1965
Which was part of the passive period
attention was focused on achieving.
1. A balance of payment on achieving
2. Furthering the development process
The widening deficit and the fallen
external reserves, which could not support up to four months minimum level of
imports led to the imposition of restraints from October, 1964 monetary tool
were directed at developing the more productive sector of the economy to
exclusion of less importance productive sectors. Tools employed include selective control on
the rate of aggregate individual bank was and advances. Reduction of the
proportion of Commercial.
Bank’s liquid assets held abroad
restrain in loan to less important and have purchase were involve. According to Chief S.B Falegan, the objectives
were to contain domestic demand and there by the drain on foreign exchange
reserves the focus of the policy was the balance of payment.
WAR AND RECONSTRUCTION PERIOD (1966-1970)
These periods witnessed the following
monetary policies.
I. Conversion
of foreign exchange reserves
II. Rising
of adequate funds for financing the Nigeria civil war.
III. Combating
the amounting inflationary pressures by encouraging the expansion of the productive sector.
The period saw an increase overall balance of payment deficit
from N18 million in 1966 50 N7 million in 1967.
The astronomical rise in imported war equipment and capital flight due
to civil war were all responsible. The
rapid expansion of military expenditure necessitated the other two items a
bore. The over all policy adopted during
the period was a relatively change monetary policy because of the slowing down
of economic activities. These was the
removal of credit guide line lowering of the discount rate from 5-4.5% in 1968 and the raising of
volume of treasuring bill from 50-80 percent of estimated from time current
revenue. The CBN Decree of 1968 further
enhanced the power of the central bank.
It acquired the power to prescribe from time cash reserve ratios to
deposit liability which the commercial banks should maintain with it, to can
for special deposit and impose a credit calling on them and to issue, allocate
and to purchase stabilization securities from financial institutions. The critical appraisal of the monetary policy
shows that they were effective but the question is how and what CBN can do to
political other major sources of government revenue to enable it to perform
more effectively like it had politicalize the petroleum industry. This is a question on which researchers in
the CBN may wish to focus their attention on.
4.3 FINANCIAL SYSTEM AND THEIR
ACTIVITIES.
The major financial institutions where Africa are central Bank, which each country established
after the dissolution of west Africa currency Board. The central Bank co-ordinate the financial
policies, specialized institution such as development bank, merchant bank and
insurance companies. The central Bank of
Nigeria was established in 1958, the bank of Ghana in 1959, Bank of sierra-leon
in 1963, Gambia currency Board in 1964, Apart from the Mangue central
dissertates de Afrique del quest (BCEAO) which was established for a French
speaking west African countries such as Guinea and Mali have their separate
central Banks This however did not affect their relationship with (BCEAO) in
the field of commercial banking expatriate bank such as the Bank of west
African, Barclay bank, standard bank and UBA. Control over 70% of West African
Banking business. The capital markets in
West African countries are still young and centers of sales of government stock
and companies share are few in each countries.
FUNCTIONS
OF FINANCIAL INSTITUTION
Central Bank is responsible for
issue of currencies.
They
also oct as banker to commercial banks under of last resort and agent of
economic development while commercial bank accept for payment on safe keeping
of valuable goods and services. The financial institution in the capital market
such as the stock exchange, development bank and financial corporation,
merchant and investment banks, insurance companies and building houses held in
giving medium term and long-term loans and investment in various project
through the insurance of stocks and shares.
4.4
PROBLEM OF CENTRAL BANK
In spite of impressive performance and
tremendous growth in the bank financial operation and management of the
economy, the Central Bank is confront with some monetary problems. The
structure of the Nigeria economy remain the same, inflation is constants
economic growth, bank are still being called into respo0nsibility of their
external fund, unemployment is soaring foreign debt over - long threaten the nation confidence in
international economic relations and pole an extermination of the naira issued
by central bank itself. A major source of the inability of the CBN development
of significantly restructure the economy in correspondence to its development
is the lack of what we wish to describe as “transformation management” of the
economy. The bank gradually transformed itself from bank with a limited
function to gigantic reputable organization without the transformation being
corresponding injected in to the financial system and real economic. It is true
that the CBN promoted and - encouraged agricultural financial institution
remained with the traditional frame work of banking system in particular operated
at the periphery and the conventional short and very short of the financial
sector. Thus, although, some transaction occurred in the sector, this was not
managed to bring their impact to beat on the real sector, another major
difficulty of Central Bank is their importance or unwillingness to exercise
monetary restraint to the extent necessary to deal with any flared up situation
or even to apply to required measures on the time, similarly, they are often
primarily concerned with the immediate effect or actions rather than longer
from implications. More so, one of the problems of the Central Bank of Nigeria can be faced to the
technique of control of the banking system i.e open market operations. The most
important transaction tools that the CBN has for influencing the supply of
money is the purchase or sale of government bonds on the open market.
How
ever, as a result of the under development nature of over financial system, in
general and the money market in particular this instrument has not been effectively
used in Nigeria. In addition the central bank finds it difficult to Control the
money in circulation for the fact that majority of the populace save their
money personally or the traditional behavior of holding their saving inside
their pots and calabashes of instead and of saving with the bank ; As a result,
the Commercial bank has only power to
raise the interest rate on the few that is sowed with them.
Further
more, the central bank of Nigeria’s responsibility of supervising the banking
system with a view to ensuring amount other, the banks comply with the banking
act and subsequent.
Amendment,
and in particular that the central bank of Nigeria credit guideline as
contained in the monetary policy auricular card inflation in the country by the
central bank of Nigeria, here effort are always thwarted. The plight of the
central bank become clearer with the realization that inflation in Nigeria has
been identified with factor e.g credit expansion by the commercial bank lastly,
expansion by the bank of over Nigeria has not been able to have branches all
over Nigeria to facilitate easy banking system or operations.
CHAPTER
FIVE
5.1
SUMMARY
The work done so far provide through
consideration of the central bank superiority role in financial system in Nigeria.
A close look at the whole revealed
that there is difference between theory and pratices. The central bank of
Nigeria has contributed to economic development of the nation in various ways such
as provision of capital fund for financial institution in the country,
institution to the development of capital market bole saving for investment,
also active in export promotes its employs moral suasion to channel credit into
priority sector and finally it gives technical and consulting assistance to the
governments and business sectors.
The C.B.N in carrying out its
superiority role has many function to perform. These financial include among
other the following issue of legal tender currency, maintain of external
reserve promotion of monetary stability and sound financial system and act as
banker and financial adviser to federal government.
Also C B N has its description
interment of control are rediscounting rate, interest, require reserve open
market operation selection credit special deposit and moral suasion.
The central Bank of Nigeria in maintaining it
superiority in sinclair system has to
supervise and monitor the activity of bank.
This is done through the banking
supervisor and examination of both off-set through the statutory submitted by
the bank and on-set through visitation by central bank of examined their books
records keeping method and internal control system.
5.2
CONCLUSION
With the realm of the write up project
few have been said about the performance and contribution of the central bank
of Nigeria.
In the past 43 years the Central Bank of Nigeria has engage itself in the
primary function of monetary management and development of sound structure.
Its role in the economy will contrive
to growth with increasing expansion of the part played by the central bank of Nigeria in the growth and development of Nigeria
financial system and of the economy as a whole will LJ
make
weather if a development country can make desirable economic progress without
such an institution activity as the supervisor of the financial system and as a
most reliable constant and adviser to the government on general economy
matters.
Moreso, the power of the Central Bank should
be more intrusively utilized most reliable consultant and advise to the
domestic economy. The bank cannot afford to set in splendid isolation twisting
its thrums while scarce financial resources of the economy are out down by
banks in pursuit
The bank will grow stringer if the
economy is strong and when the value of its issue is we are of the opinion that
CBN is capable of fostering the country’s financial economic development
assigning its operation economic condition and need with well guide prudent financial
behaviours.
5.3
RECOMMENDATIONS
FROM
THE PROBLEMANAL YSED, A TRI4NSFORMA TIONAL
Management of the bank would required
first and foremost the integration of the banking segment with the rest of the
financial sector in the economy.
An attempt to achieve this was
partially made in the 1967-69 amendment in the amendment reserve assistance
requirements were applied to all “function institution” that do banking
business. By the definition of a bank is the banking decree No. I of 1969,
acceptance houses were included but excluding line purchase institution and
insurance companies. New bank of the first time came under the ambit of
monetary policy. The traditional discrimination which near bank institution are
excluded from monetary control was only very partially minimized monetary
control should apply to all financial institution under transformational
monetary management.
Secondly, the CBN should endeavour to
formulate some monetary measure to deal with any unwanted situation they should
try to issue out guidelines at the beginning of each financial year.
Also, the CBN in conjunction with
federal government should form a task force committee who go round and fish out
money market in the public. The government can enact some laws to guide this
aims furthermore, for a bank to expand her tentacle, we are commending the
effort of Central Bank in decentralization its activities each state to such as
CBN branch.
Rural bank should be able to
understand asset and motivate rural people to utilize the facilities. They
should go out and not wait for the rural people to come to them.
In addition, we will like to recommend
that central bank should be given power to control some relevant aspects of the
operation. The federal government and all financial institution, if this
recommendation is accepted by the government of Nigeria, this will be useful as
the ability of CBN to control the growth sector of the financial system such as
insurance, and line purchase sector, will enhance it overall effectiveness.
BIBLIOGRAPHY
ADEBAYO
R.O (1999) The Element
of Banking First Edition
ADEKANYE
FEMI(1933) The Element of Banking in Nigeria
NDEKNU
, EDDY C. (1995) (1) The Nigeria
Banker. January- April. 1995
(11)
Bullion by central Bank. July — Sept 1997
NWANKWO G.O (1980). The
Nigeria Financial system London.
The Macmillan Press Limited.
OLAFAMOYIN,
VICTOR (1979) “O& A” Level, west African school
Certificate
Economic First Edition.
FRANK. W. (1993) Business
Account 2 (1st Edition) London
Pitman Publishing.
ENK
DOH J.S (1979) Principles of Accounting for West
African
1&2 Ibadan University Press Limited,
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